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Summary: US CPI up in February; in line with expectations; “core” rate also up but less than expected; “nothing for inflationistas” to sound inflation alarm; headline rate driven by higher fuel prices; “base effects” to prompt higher annual inflation rates from March

The annual rate of US inflation as measured by changes in the consumer price index (CPI) halved from nearly 3% in the period from July 2018 to February 2019. It then fluctuated in a range from 1.5% to 2.0% through 2019 before rising above 2.0% in the final months of that year. Substantially lower rates were reported from March 2020 to May 2020 but subsequent reports indicated consumer inflation has largely returned to pre-pandemic levels.

The latest CPI figures released by the Bureau of Labor Statistics indicated seasonally-adjusted consumer prices rose by 0.4% on average in February. The result was in line with the generally expected figure and higher than January’s 0.3% increase. On a 12-month basis, the inflation rate accelerated from January’s reading of 1.4% to 1.7%.

“Headline” inflation is known to be volatile and so references are often made to “core” inflation for analytical purposes. Core inflation, a measure of inflation which strips out the volatile food and energy components of the index, increased by just 0.1% on a seasonally-adjusted basis for the month. The result was less than the expected 0.2% but higher than January’s 0.1% increase. The annual rate slipped for a second consecutive month, this time from 1.4% to 1.3%.

NAB currency strategist Rodrigo Catril said “there is nothing for the inflationistas to ring the alarm while at the same time it provides the Fed plenty of breathing space ahead its meeting next week.”

US Treasury bond yields barely moved on the day. By the close of business, the 2-year yield remained unchanged at 0.16%, the 10-year yield had slipped 1bp to 1.52% and the 30-year yield finished unchanged at 2.24%.

In terms of US Fed policy, expectations of any change in the federal funds range over the next 12 months remained fairly soft. March 2022 futures contracts implied an effective federal funds rate of 0.095%, just above the spot rate.

The largest influence on headline results is often the change in fuel prices. In February, “motor fuel” increased by 6.4% on a seasonally adjusted basis, adding nearly 0.2% to the total change for the month. “Shelter” costs increased by 0.2%, adding around 0.07% to the overall increase. Commodity prices excluding food and energy fell by 0.2%, subtracting 0.04% from the index.

Summary: Household sentiment improves again in March; improving economic conditions and prospects, domestically and abroad; all five sub-indices higher; unemployment index lower; sentiment index well above long-term average.

After a lengthy divergence between measures of consumer sentiment and business confidence in Australia which began in 2014, confidence readings of the two sectors converged again around July 2018. Both readings then deteriorated gradually in trend terms, with consumer confidence leading the way. Household sentiment fell off a cliff in April but, after a few months of to-ing and fro-ing, it then staged a full recovery.

According to the latest Westpac-Melbourne Institute survey conducted in the first week of March, household sentiment has improved again, taking it to an almost-elevated level. The Consumer Sentiment Index rose from February’s reading of 109.1 to 111.8.

“The main factors driving the Index are improving economic conditions and prospects, both domestically and abroad, particularly as they relate to our labour market,” said Westpac chief economist Bill Evans.

Treasury bond yields fell along the curve following noticeable falls in US Treasury bond yields overnight and comments by RBA chief Phillip Lowe during a speech in Sydney. By the close of business, the 3-year ACGB yield had lost 3bps to 0.24%, the 10-year yield had shed 6bps to 1.71% while the 20-year yield finished 10bps lower at 2.35%.

In the cash futures market, expectations of a change in the actual cash rate, currently at 0.03%, fell back slightly. At the end of the day, contract prices implied the cash rate would rise slowly to around 0.10% by mid-2022.

All five sub-indices registered higher readings, led by an improvement in the “Economy, next 12 months” sub-index.

The Unemployment Expectations index, formerly a useful guide to RBA rate changes, fell from 114.5 to 112. Lower readings result from fewer respondents expecting higher unemployment in the year ahead.

Summary: Business conditions, confidence improve in February; “optimistic mood” broadly based across states, industry groups; capacity usage rate increases again; evidence labour demand growth will continue; results point to robust business sector recovery.

NAB’s business survey indicated Australian business conditions were robust in the first half of 2018, with a cyclical-peak reached in April of that year. Readings from NAB’s indices then began to slip, declining to below-average levels by the end of 2018. Forecasts of a slowdown in the domestic economy began to emerge in the first half of 2019 and the indices trended lower, hitting a nadir in April 2020 as pandemic restrictions were introduced. Conditions have improved markedly since then and NAB’s indices are both back to elevated levels.

According to NAB’s latest monthly business survey of over 400 firms conducted over the second half of February, business conditions improved. NAB’s conditions index registered 15, up from January’s revised reading of 9.

“Business conditions bounced to return to around multi-year highs…after slipping in the month prior, with trading, profitability and employment conditions all marking solid improvements,” said NAB chief economist Alan Oster.

Business confidence improved and NAB’s confidence index rose from January’s revised reading of +12 to +16. Typically, NAB’s confidence index leads the conditions index by approximately one month, although some divergences have appeared in the past from time to time.

“This optimistic mood is broadly based across the states and across the broad industry groups. The roll-out of the vaccine is a major boost, reducing the risk of another round of state border closures,” said Westpac senior economist Andrew Hanlan.

Short-term Commonwealth Government bond yields declined while longer-term yields remained almost stable on the day, in contrast to higher US Treasury yields overnight. By the end of the day, the 3-year ACGB yield had lost 2bps to 0.27% while the 10-year yield remained unchanged at 1.77% and the 20-year yield finished 1bp higher at 2.45%.

In the cash futures market, expectations of a change in the actual cash rate, currently at 0.03%, remained fairly stable. At the end of the day, contract prices implied the cash rate would inch up slowly to around 0.14% by mid-2022.

Summary: February non-farm payrolls increase much more than expected; December, January figures revised up modestly; jobless rate declines, participation rate steady; “true” jobless rate 10%; end-of-year hiring lull “over”; jobs-to-population ratio up again; underemployment rate steady, Hourly pay growth unchanged.

The US economy ceased producing jobs in net terms as infection controls began to be implemented in March 2020. The unemployment rate had been around 3.5% but that changed as job losses began to surge through March and April of 2020. The May 2020 non-farm employment report represented a turning point and subsequent months provided substantial employment gains. Changes in recent months have been more modest but mostly positive.

According to the US Bureau of Labor Statistics, the US economy created an additional 379,000 jobs in the non-farm sector in February. The increase was well above the 100,000 which had been generally expected earlier in the week and more than double the 166,000 jobs which had been added in January after revisions. Employment figures for December and January were revised up by a total of 38,000.

The unemployment rate declined again, from January’s rate of 6.3% to 6.2%. The total number of unemployed decreased by 0.158 million to 9.972 million while the total number of people who are either employed or looking for work increased by 50,000 to 160.211 million. The small rise in the number of people in the labour force was not enough to change the participation rate from January’s rate of 61.4%.

NAB Head of FX Strategy within its FICC division said, “While the headline payroll number was taken at face value with markets initially responding accordingly, Treasury Secretary Janet Yellen was quick to remind us that taking into account that some 4 million people have dropped out of the labour force during the pandemic, the true unemployment rate is 10%.”

Short-term US Treasury yields declined a touch but long-term yields moved substantially higher on the day. By the close of business, the 2-year bond yield had slipped 1bp to 0.13% while the 10-year yield had gained 8bps to 1.56% and the 30-year yield finished 4bps higher at 2.32%.

ANZ Head of Australian Economics David Plank said, “Most of the job gains came in leisure and hospitality, particularly food services and drinking places, as the COVID infection rate receded. Employment in construction fell, but that was due to weather disruptions.” He said December’s fiscal stimulus had played a part “and that the lull in hiring over the turn of the year is over.”

Summary: ADP payroll numbers increase in February; less than consensus figure; January rise revised up; figures up across firms of all sizes; gains entirely in services sector, goods sector contracts; report “will bias non-farm payroll expectations downwards.

The ADP National Employment Report is a monthly report which provides an estimate of US non-farm employment in the private sector. Since publishing of the report began in 2006, its employment figures have exhibited a high correlation with official non-farm payroll figures, although a large difference can arise in any individual month.

The latest ADP report indicated private sector employment increased by 117,000 in February, less than the 165,000 which had been generally expected. January’s rise was revised up by 21,000 to 195,000.

US Treasury yields moved noticeably higher on the day. By the close of business, the 2-year Treasury bond yield had gained 3bps to 0.14%, the 10-year yield had increased by 8bps to 1.48% while the 30-year yield finished 7bps higher at 2.27%.

In terms of US Fed policy, expectations of any change in the federal funds rate over the next 12 months remained soft. Federal funds futures contracts for March 2022 implied an effective federal funds rate of 0.095%, just above the current spot rate.

Employment numbers in net terms increased across businesses of all sizes, with medium-sized firms once again the main drivers of the month’s gain. Firms with less than 50 employees filled a net 32,000 positions, mid-sized firms (50-499 employees) gained 57,000 positions while large businesses (500 or more employees) accounted for 28,000 additional employees.

Summary: ISM purchasing managers index (PMI) up; above consensus expectation; focus on higher “prices paid” component; other sub-indices also strong; signs of supply chain bottlenecks;  US economy growing at solid pace.

US purchasing managers’ index (PMI) readings reached a cyclical peak in September 2017 before they started a downtrend which stabilised in late 2019 after a truce of sorts was made with the Chinese regarding trade. The ISM report from March 2020 signalled a contraction in US manufacturing activity had begun and it stayed in this state until June. Subsequent month’s readings implied growth of the US manufacturing sector had resumed.

According to the latest Institute of Supply Management (ISM) survey, its Purchasing Managers Index recorded a reading of 60.8% in February. The result was above the generally expected figure of 58.8% and higher than January’s reading of 58.7%. The average reading since 1948 is 52.9% and any reading above 50% implies an expansion in the US manufacturing sector relative to the previous month.

NAB economist Tapas Strickland paid particular attention to the prices paid sub-index which “rose to its highest level since 2008 to 86.0 from 80.0” while noting the new orders, production and employment sub-indices “were also strong”. He described an increase in supplier delivery times as “a sign of supply chain bottlenecks and potentially a source of higher temporary inflationary pressure.”

Ultra-long US Treasury bond yields increased noticeably on the day while shorter-term yields remained almost stable. By the close of business, the 2-year Treasury bond yield remained unchanged at 0.12%, the 10-year yield had slipped 1bp to 1.43% while the 30-year yield finished 6bps higher at 2.20%.

Purchasing Managers’ Indices (PMIs) are economic indicators derived from monthly surveys of executives in private-sector companies. They are diffusion indices, which means a reading of 50% represents no change from the previous period, while a reading under 50% implies respondents reported a deterioration on average. According to the ISM, a reading “above 42.8%, over a period of time, generally indicates an expansion of the overall economy,”

Manufacturing PMI figures appear to lead US GDP by several months despite a considerable error in any given month. The chart below shows US GDP on a “year on year” basis (and not the BEA annualised basis) against US GDP implied by monthly PMI figures.

Summary:  Job ads increase in February; double-digit growth over past 12 months; despite WA, Vic lockdowns; “ongoing strength” suggests job growth in February, March.

From mid-2017 onwards, year-on-year growth rates in the total number of Australian job advertisements consistently exceeded 10%. That was until mid-2018 when the annual growth rate fell back markedly. 2019 was notable for its reduced employment advertising and this trend continued into the first quarter of 2020. Figures plunged in April 2020 as pandemic restrictions took effect but then recovered relatively quickly.

According to the latest ANZ figures, total advertisements increased by 7.2% in February on a seasonally-adjusted basis. The rise followed a 2.6% increase in January and an 8.7% gain in December after revisions. On a 12-month basis, total job advertisements were 13.4% higher than in February 2020, up from January’s comparable figure of 5.5%.

“ANZ Job Ads growth accelerated out of the summer holidays, despite five-day lockdowns in Western Australia and Victoria during February,” said ANZ senior economist Catherine Birch.

The figures were released on the same day as a swag of local economic reports, including the Melbourne Institute’s Inflation Gauge and January’s housing finance figures. Commonwealth bond yields fell significantly on the day, reversing some of the previous week’s rises and following large falls of US Treasury yields on Friday night. By the close of business, the 3-year ACGB yield had shed 9bps to 0.28%, the 10-year yield had dropped 24bps to 1.67% and the 20-year yield finished 21bps to 2.36%.

Birch said “ongoing strength” in the series suggests employment growth should continue in February and March and “the impact of the end of JobKeeper in March will be mitigated to some extent.” However, she also noted “we are still in the dark as to how many businesses and workers remain on JobKeeper” and therefore the impact of the end of the programme remains uncertain.

Summary: Home loan approvals significantly increase in number in January; owner-occupier loans outweighing investor loans by nearly 2:1; value of loan commitments accelerate; resurgence moving quickly into “fully-fledged boom”.

A very clear downtrend was evident in the monthly figures of both the number and value of home loan commitments through late-2017 to mid-2019. Then the RBA reduced its cash rate target in a series of cuts and both the number and value of mortgage approvals began to noticeably increase. Figures from February through to May provided an indication the trend had finished but subsequent figures pushed the annual rate of increases back into positive territory.

January’s housing finance figures have now been released and the total number of loan commitments (excluding refinancing loans) to owner-occupiers increased by 12.3%. The gain came after a 7.1% rise in December after revisions and, on an annual basis, the rate of growth increased from December’s figure of 33.1% to 48.0%.

“Owner-occupier lending continues to drive the recovery, with investors down to 38% of new loans, the lowest since 2009, despite rising momentum in investor lending,” said ANZ economist Adelaide Timbrell.

The figures were released on the same day as a swag of local economic reports, including the Melbourne Institute’s Inflation Gauge and ANZ’s latest Job Ads survey. Commonwealth bond yields fell significantly on the day, reversing some of the previous week’s rises and following large falls of US Treasury yields on Friday night. By the close of business, the 3-year ACGB yield had shed 9bps to 0.28%, the 10-year yield had dropped 24bps to 1.67% and the 20-year yield finished 21bps to 2.36%.

In dollar terms, total loan approvals excluding refinancing increased by 10.5% over the month, up from December’s 8.6% increase after revisions. On a year-on-year basis, total approvals excluding refinancing increased by 44.3%, an acceleration from the previous month’s comparable figure of 31.2%.

The total value of owner-occupier loan commitments excluding refinancing increased by 10.9%, more than December’s revised figure of 8.7%. On an annual basis, owner-occupier loan commitments were 52.3% higher than in January 2020, whereas December’s annual growth figure was 38.9%.

Summary: Melbourne Institute inflation creeps up in February; annual rate ticks up.

Despite the RBA’s desire for a higher inflation rate, ostensibly to combat recessions, attempts to accelerate inflation through record-low interest rates have failed to date. The RBA’s stated objective is to achieve an inflation rate of between 2% and 3%, “on average, over time.” Since the GFC, Australia’s inflation rate has been trending lower and lower; the “coronavirus recession” then crushed it in the June quarter of 2020.

The Melbourne Institute’s latest reading of its Inflation Gauge index crept up by a modest 0.1% in February. The rise follows increases of 0.2% and 0.5% in January and December respectively. On an annual basis, the index rose by 1.6%, up from 1.5% in January.

The figures were released on the same day as a swag of local economic reports, including January’s housing finance figures and ANZ’s latest Job Ads survey. Commonwealth bond yields fell significantly on the day, reversing some of the previous week’s rises and following large falls of US Treasury yields on Friday night. By the close of business, the 3-year ACGB yield had shed 9bps to 0.28%, the 10-year yield had dropped 24bps to 1.67% and the 20-year yield finished 21bps to 2.36%.

The Melbourne Institute’s Inflation Gauge is an attempt to replicate the ABS consumer price index (CPI) on a monthly basis. It has turned out to be a reliable leading indicator of the CPI, although there are periods in which the Inflation Gauge and the CPI have diverged for as long as twelve months. On average, the Inflation Gauge’s annual rate tends to overestimate the ABS headline rate by around 0.1% on average.

Central bankers desire a certain level of inflation which is “sufficiently low that it does not materially distort economic decisions in the community” but high enough so it does not constrain “a central bank’s ability to combat recessions.” Hence the recent obsession among central banks, including the RBA, to increase inflation.

Summary: US Fed’s favoured inflation measure up by 0.3% in January; above market expectations; annual rate ticks up after revisions; Treasury bond yields fall back following previous day’s spike.

One of the US Fed’s favoured measures of inflation is the change in the core personal consumption expenditures (PCE) price index. After hitting the Fed’s target at the time of 2.0% in mid-2018, the annual rate then hovered in a range between 1.8% and 2.0% before it eased back to a range between 1.5% and 1.8% through 2019. It then plummeted below 1.0% in April 2020 before rising in through the remainder of 2020.

The latest figures have now been published by the Bureau of Economic Analysis as part of the January personal income and expenditures report. Core PCE prices rose by 0.3% over the month, more than the 0.1% which had been generally expected but in line with December’s 0.3% increase after rounding. On a 12-month basis, the core PCE inflation rate ticked up from December’s revised rate of 1.4% to 1.5%.

ANZ economist Hayden Dimes said December’s fiscal package had produced a 2.4% rise in personal spending which fed into higher prices. “The spending on goods was broad-based and its strength showed in the PCE deflator data, with the 3-month annualised rate of change rising to 2.4%.

US Treasury bond yields fell back markedly after spiking on Thursday. By the close of business, the 2-year Treasury bond yield had lost 5bps to 0.12%, the 10-year yield had fallen by 9bps to 1.44% while the 30-year yield finished 16bps lower at 2.14%.

“With base effects due to push annual inflation higher in coming months, the data will feed questions about Fed patience, despite the Fed expecting any lift in prices to be transitory,” said Dimes.

The core version of PCE strips out energy and food components, which are volatile from month to month, in an attempt to identify the prevailing trend. It’s not the only measure of inflation used by the Fed; it also tracks the Consumer Price Index (CPI) and the Producer Price Index (PPI) from the Department of Labor. However, it is the one measure which is most often referred to in FOMC minutes.